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-- Both volatile and core components appear to have driven German inflation
-- Today's data suggests big upside risk to consensus forecasts for Eurozone
inflation, due out tomorrow
By Jaspreet Sehmi
     LONDON (MNI) - German inflation accelerated ahead of expectations in
September, according to preliminary data released today by the German Federal
Statistical Office. On both the national CPI and EU-harmonised HICP measures,
prices picked up by 0.4% m/m, leaving the respective annual rates at 2.3% (the
steepest in nearly seven years) and 2.2% (a four-month high). These numbers
suggest strong upside risk to market projections of a 2.1% Eurozone-wide print,
due for publication tomorrow.
     We highlight five points for your attention.
     Volatile Components Provide Further Upward Pressure: Energy inflation, on
the national CPI measure, accelerated to 7.7% from 6.9% in August. As we
highlighted in our preview of today's data, Brent crude prices hit a four-year
high of just over $82/b earlier this week, and factors including heightened
geopolitical tensions have increased the likelihood of further significant rises
ahead. Energy price developments are likely to keep headline inflation elevated
throughout Q4. Food inflation, which also tends to be volatile, quickened to
2.8% y/y in September from 2.5% y/y in August, reflecting the impact of a hot
and dry summer.
     Regional Data Suggests Core Components Also Drove September Headline Gains:
While today's preliminary release does not include a detailed breakdown,
indications from state-level data suggest that September's headline acceleration
was also driven by a pick-up in core inflation. As we pointed out in our
preview, recent declines in core inflation have been driven primarily by
temporary factors and base effects, and we have been looking for it to start
moving higher again. Monthly volatility aside, we expect core inflation to trend
higher over the coming year, as companies start to pass on rising wage costs to
     Leading Institutes Downgrade German Growth Forecasts: While we look for
core inflation to trend higher, we expect this to occur at a subdued pace. The
German economy remains healthy, but growth is being restrained by a number of
factors, thus limiting the emergence of any strong underlying inflationary
pressures. Although the domestic picture is relatively robust, labour shortages
remain a key challenge. On the external front, a number of issues continue to
weigh on confidence and investment plans, including trade conflicts, fears of a
disorderly Brexit, Italian debt concerns and slower global growth. In a report
for the German government released earlier today, five of Germany's leading
economic research institutes cited these factors in downgrading their growth
forecasts to 1.7% in 2018 and 1.9% in 2019 (from 2.2% and 2.0% previously).
     Eurozone Inflation To Rise Further Above ECB Target: Today's German data
suggests that bloc-wide inflation likely rose further above the ECB's 'close to
but below 2.0%' target in September. Markets are expecting tomorrow's Eurozone
HICP release to show annual inflation edging up to 2.1% from 2.0% in August.
However, a stronger rise, perhaps in the region of 2.2-2.3%, now looks more
     Data Supports ECB's Policy Plans: Today's data, as well as our expectations
for tomorrow's Eurozone print, lend credence to the ECB's plans to start
normalising its unprecedentedly loose monetary policy. Policymakers are keen to
reclaim some monetary ammunition, and headline inflation sticking above target
serves to justify some stimulus withdrawal. The Governing Council anticipates
ending net bond purchases at the end of the year, bar any exceptional shocks.
Meanwhile, the outlook for core inflation - despite indications of a nascent
uptrend - remains subdued, and thus supports the ECB's cautious approach to
interest rate hikes.
--MNI London Bureau; +44 207-862-7489; email:
[TOPICS: MAGDS$,M$E$$$,M$G$$$,M$X$$$,M$XDS$]